Liquidation: launch the mothership early

A standard weapon in any liquidator’s arsenal is the claim for an unfair preference payment against a creditor. Liquidators can bring these proceedings in the name of the one company against numerous creditors in one court application. This process has been referred to as mother proceedings from as long ago as 20021, which has taken on the more sci-fi description of mothership proceedings since 2017 2.

As Justice Austin noted in Dean-Willcocks v Air Transit International:

The advantages to the liquidator are obvious. All claims are pursued in the same Court, regardless of the amounts involved. All parties to impugned transactions are bound by the decision of the Court with respect to such matters as insolvency, rather than being affected by presumptions which they may each rebut. There is a single filing fee (not an insubstantial consideration where a very large number of impugned transactions is involved).

However, the various court rules that govern these proceedings still operate. One of those rules, generally, is that for two or more parties to be joined as defendants to one proceeding, there needs to be a common question of law or fact; and the relief claimed arises out of the same transaction, or series of transactions. Otherwise, leave of the Court is required.3

The nature of mothership proceedings

Unfair preference claims do not usually fall within the first two of these requirements. Proceedings against multiple creditors are not usually based on a common question of law or fact, as the circumstances of each preference claim will not be the same as the others. The only commonality is the insolvency of the plaintiff company, but there is no commonality amongst the defendants. Perhaps the date of insolvency may be in dispute, but that only satisfies the first part of the test. The relief claimed will not arise out of the same transactions. So, if a liquidator intends to utilize mothership proceedings, leave of the Court is required at some stage.

Leave is required, and early

Usually, that leave would be sought in an ex parte application at the same time as the commencement of the mothership proceedings. It is perfectly understandable why leave should be usually granted. As Austin J held in Dean-Willcocks:

The adoption of a procedure that is speedy, inexpensive and efficient from the point of view of liquidators should facilitate the commencement and maintenance of proceedings in cases where there appear to be reasonable prospects of success. That would be an important outcome in terms of public policy and the interests of the commercial community as a whole.4

It is possible to seek leave of the Court after the commencement of the proceedings. A problem could arise though if the mothership proceedings are commenced without leave, and by the time leave is sought, a liquidator is outside the 3-year limitation period on unfair preference claims6. If leave is not granted, the liquidator will be left with one defendant, and no others, to pursue, since the court would not grant leave if the proceedings would be statute-barred, because it would be an act of futility7.

This was the situation for the liquidators of Precision Catering Equipment Pty Ltd (in Liq). In an earlier decision this year in the Federal Court of Australia8, the Court considered whether leave should be granted to properly join a number of defendants, who had opposed their original joinder on the basis that the leave joined them from a date outside the limitation period.

In that case, the Statement of Claim was filed against all defendants, without leave, on 26 April 2019. The 3-year limitation period expired after 2 May 2019. The Court didn’t make the orders until 28 August 2019. Jackson J held that “the failure of the liquidators to take any step to seek to regularise the course they have taken is a significant factor in favour of the exercise of the power to remove the applicants as parties, and at that point it looked like curtains for the liquidators. The Court had not been given reasons for the delay in seeking leave, nor for not seeking orders to extend the limitation date prior to its expiry. The Court was also very conscious of the potential for irreversible prejudice, and that the liquidators represented the interests of unsecured creditors, who presumably have had no input into the course the liquidators have taken. The liquidators were ordered to provide that evidence.

On 18 October 2019, the proceedings returned to the Federal Court9, and the evidence confirmed that some 67 preference action demands were issued, resulting in the proceedings joining 17 defendants. 6 creditors had settled only in the week prior to filing the proceedings. It was held that the liquidators, and their lawyers, had acted in good faith, and under the mistaken belief that leave was not originally required. As the Court noted:

The prejudice to unsecured creditors of Precision Catering if certain defendants cease to be parties to the proceeding is a much more substantial factor, and it weighs in favour of exercising the discretions in favour of the liquidators here. The object of the court is not to punish parties for mistakes made in the conduct of their case, but to correct errors with the result that a decision can be made on the real matters in controversy: Caason Investments Pty Ltd v Cao [2015] FCAFC 94; (2015) 236 FCR 322 at [20]. Even less is it the object of the court to punish third parties for the mistakes of those who represent their interests.

Leave to join the defendants was granted nunc pro tunc10, such that the joinder of all defendants was taken to have been at the commencement of the proceedings, that is (most importantly) before the expiration of the limitation period.

Lessons

Many liquidations involve multiple unfair preference claims. There is nothing unusual in that. The management of these claims should not be done on a haphazard basis. These claims should be properly project managed between the liquidator’s office and the lawyers, so that deadlines are met, and appropriate court applications are prepared and made within ample time.

It has been the case since 2002 that liquidators who wish to use mothership proceedings to recover their unfair preference claims should seek leave of the Court beforehand. That usually entails filing proceedings naming all defendants, along with an Interlocutory Process for the leave application. If the application is not made then, it should be made as soon as possible after the commencement of the proceedings.

But don’t think a leave application can just be filed the week before the 3 year limitation period expires, along with your mothership proceedings. It is by no means certain that leave will be granted. If the delay is just slackness on the part of those involved, it is possible that leave will not be granted. It’s better to find that out sooner rather than far too late.

Obviously, liquidators also have the option to make an application to extend the 3 year limitation period. But again, that must be prepared, filed and determined inside the expiry date.

Launch your mothership early.

1 Dean-Willcocks v Air Transit International Pty Ltd [2002] NSWSC 525

2 Re Bias Boating Pty Ltd [2017] NSWSC 1524 at [18])

3 For example: Regulation 6.19 of the NSW Uniform Civil Procedure Rules and Rules 9.02 and 9.05 of the Federal Court Rules

This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article